TL;DR
Jensen's Inequality: For a convex function f, f(E[X]) <= E[f(X)]. This concept is essential for quantitative trading interviews and is frequently tested at top firms.
By Valenke Exam Prep Team·Last updated 2026-06-01
Analysis
Jensen's Inequality
For a convex function f, f(E[X]) <= E[f(X)].
Jensen's inequality: If is convex and is a random variable:
If is concave, the inequality flips: .
Intuition: A convex function "bows up." The function value at the average is less than the average of the function values.
Common applications:
- is convex: , so
- is concave: , proving AM GM
- is convex:
When to use: Bounding expectations of nonlinear functions. Proving that averages behave better than individual values. Establishing moment inequalities.
This is a fundamental technique — many specific inequalities (AM-GM, power mean) are special cases.
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